It was a historic week for Indian markets as Indian headline Indices hit fresh record highs, the S&P BSE Sensex hit 40,000 for the first time while Nifty50 also scaled 12,000 mark, and investors' wealth rose by over Rs 6 lakh crore for the week ended May 24. The clear mandate of NDA government removed the overhang of uncertainty from the markets and now we have political stability and predictability of economic policies, which investors normally look forward to before investing with a long-term time horizon. This is a significant positive for market sentiment and for attracting global investors.
At this point a significant number of companies have already declared their Q4 (March’ 19) results and overall there is a positive change in both sales and net profit on an year over year basis, however on a sequential basis, both sales and net profits are stagnant and except for a few pockets of strength, there are no apparent signs of an uptick in earnings growth.
Consumption that is a prime driver of India’s economy has started sputtering in the recent past as evident by subdued sales in vehicle and two-wheeler, and moderate off take of consumer durables such as air-conditioners and refrigerators. There is muted demand even in small ticket consumer staples items such as shampoos, detergents and soaps.
While markets may remain upbeat in the near term as continuing initial euphoria, it will come to terms with the ground realities soon enough, and the focus would shift to hardcore economic decisions and the manner in which the slowdown and economy is handled in NDA’s second term. Now it is important to understand the priorities of the new government that would enable the investors to ride the rally and position the investment portfolios accordingly.
Some of the priorities of the new government should be on addressing the agrarian crisis and to boost rural demand. Affordable housing is another such area where the government has put a lot of energy in the previous term, and going forward it is expected that the sector would continue to be on priority. Addressing the liquidity crisis and restoring faith in the shadow banking industry is another area where the new government has its work cut out. The government through its manifesto has already committed to a massive infrastructure push, an astounding sum of Rs 100 Trillion is planned to be spent on the infrastructure sector. With such aggressive push on capacity building it is expected that infrastructure, steel and cement companies would be the natural beneficiaries.
The government’s thrust on agriculture is expected to put more money in the rural economy, which could revive the consumption growth. Increased consumption should result in better capacity utilisation, which will trigger the revival of capital expenditure by companies and in the medium term, the capex cycle expected to start and earnings would pickup.
As the election uncertainty is already out of the way, drivers for markets will swing from politics to fundamentals, more so on the earnings growth trajectory. Therefore, it is a perfect time to go for bargain hunting and to pick companies, which are fundamentally sound and have an adequate free float in the market.
Companies with rural Focus: In order to alleviate farm stress it is expected that the government would aggressively push rural infrastructure, that includes rural roads, irrigation, rural housing, warehousing, It is expected that such push would lead to both direct and indirect income generation in the rural economy. Some of the sectors, which are likely to benefit directly are: farm equipment, fertilizer, consumer goods, two wheelers and small cars, agri-finance and micro finance companies.
Infrastructure Related Business: Capital investment in infrastructure development especially in water linkage, roads among others will be in focus of the new government therefore businesses such as construction, cement, irrigation equipment, electricity distribution and financial institutions both public and private are expected to do well going forward.
Investment Thesis: If one looks at the companies that represent the Indian stock markets and are included in the benchmark indices such as Sensex and Nifty, they will find that a lot of positivity is already built in the stock prices and therefore further upside is limited in the large cap space. Although benchmark indices Sensex and Nifty are close to all-time highs, the broader market, particularly the mid- and smallcap segment, have been battered over the past one and half years. The S&P BSE Midcap index is still down by about 14 percent from its 52-week high while the S&P BSE Smallcap index is down by over 19 percent from its peak. It is therefore expected that going forward the big outperformance in terms of returns could come from the broader markets, which include select names in the mid cap and small cap space. Investors as an investment strategy should therefore accumulate good quality stocks in the midcap and smallcap space in small steps. These stocks can be volatile at times however; the risk reward proposition looks favorable as a significant number of stocks in this space are still in the oversold territory. We have collated a list of top companies in the large cap, midcap and smallcap categories, which we believe, can provide superlative results in the midterm to long term. The names in the largecap space are a little expensive but the companies are market leaders in their area of operation therefore the premium valuation are justified to an extent.
The list of stocks presented here is not exhaustive; an attempt has been made to pick companies with solid growth trajectory with implied safety. As an investment rule investors should always look for companies with strong fundamentals, solid track record of growth, and efficient management and a robust corporate governance sectors, investors are also advised to stay in good quality stocks with a time horizon of three to five years. Investors are requested to do their own due diligence before buying or selling any of the stocks mentioned in the write up.
The author is the Director Wealth Discovery/EZ Wealth